riglogix november 15, 2010 - rigzone · its premium valuation while also providing a solid overview...

Highlighting ENSCO A Comparison of Operational and Financial Metrics

NOvEMbEr 15, 2010

S&P 500 PEERS OSX

60

70

80

90

100

110

Apr-

10

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct-

10

Indexed Returns - Post Oil SpillIndexed returns - Post Oil Spill

Since the Deepwater Horizon explosion and subsequent oil spill, regulatory concerns and under-utilization in the Gulf of Mexico (stemming from permitting issues that resulted in lost revenue for offshore drillers) have had a hand in pushing the share prices for industry players lower. ENSCO’s share price has rebounded from the recent industry-wide decline much more rapidly than its peers. In this report we highlight ENSCO’s distinguishing facets that support its premium valuation while also providing a solid overview of the industry.

• FlEEt QuAlIty DrIvES SuPErIOr utIlIzAtION. utilization at ENSCO has historically fared much better than both the industry as a whole and ENSCO’s publicly-traded peers. Since June 2000, ENSCO’s utilization has averaged 90% compared to global rates of 82.5% and a peer group’s average of 80%. this is due to a desirable fleet mix that is weighted towards the premium jackup market and focused exclusively on the ultra-deepwater floating market.

• HIGHEr OPErAtING MArGINS. Over the past twelve months, ENSCO has achieved operating margins of 40%, 200 basis points higher than the average of nine of its publicly traded peers. Newly built rigs commencing operations over the next two years have the ability to drive margins higher once revenues for each of these units are fully loaded onto the income statement.

• DESIrAblE bAlANCE SHEEt. ENSCO’s 4% debt-to-cap leaves a considerable amount of financing capacity that could spur earnings growth. From an organic perspective, ENSCO is in a position to purchase another four uDW rigs were it to raise its debt levels to 46% of capital, putting their balance sheet on par with industry comps. this would imply +$2 billion of new debt spent on assets that when fully operational would generate approximately $3.50 in potential annual earnings using conservative operating metrics. Discounting these potential earnings back five years would imply a valuation that is approximately $26 per share higher than the current share price using a P/E multiple of 12x and assuming an 8.5% cost of capital.

tAblE OF CONtENtS

Industry trends: Worldwide utilization & Dayrates 2Floater utilization & Dayrates 3Jackup utilization & Dayrates 4rig type Profiles 5Geographic Penetration 6 ENSCO versus Peers: Operating Metrics 7Financial Metrics 8Dupont Analysis 9risk/reward Comparison 10Indexed Share Price Performance 11

FuNDAMENtAlS

Price (Nov 12, 2010) $48.16 book value Per Share $41.62 Market Capitalization $6,953 Shares Outstanding (mn) 141.1Average Daily volume (ytD - mn) 3.0Float 94% Dividend yield (Annual %) 2.9%Debt-to-Equity 4.5%return on Equity (ltM %) 11.2%

rIGlOGIx rESEArCH tEAM

trey CowanSr. rig [email protected]

liz tysallData & research Manager

Mary Jo MercerData Analyst

Sergio GarciaCreative Director

RigLogixupstream intel l igence system

your gateway to the oil and gas industry

RigLogix SpeciaL RepoRt NOvEMbEr 15, 2010

Worldwide utilization and Dayrates

2

Overall utilization by ENSCO is tracking higher than the industry’s average. Specifically, for the month of October, ENSCO’s utilization was 78% or 500 basis points above the industry’s 73% average. After seeing a little surge during the summer months, ENSCO’s monthly utilization rates have slipped of late but are still on par with where the year started. In contrast, global utilization rates have dropped 200 basis points compared to January 2010’s pace (75%).

enSco 8500

ENSCO’s asset mix ( jackups versus floaters) is mostly comprised of jackups at 91%. this is significantly higher than the overall global rig fleet mix of 62% jackups and 38% floaters. It is this variance in mix that results in ENSCO’s average monthly dayrates falling short of the global averages by approximately $120k/day. We note that when dayrates are compared by rig types, ENSCO’s results are more meaningful and consistent with the industry.

SOURCE: RigLogix

60%

65%

70%

75%

80%

85%

90%

95%

100%

- - -

Oct

-1009 09 10 - 10

- 10

- 10

- 10

- 10

- 10

- 10

- 10

Nov

Dec

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

ENSCO Versus Global - Utilization

ESV World

-

50

100

150

200

250

300

ENSCO Versus World - Dayrates

SOURCE: RigLogix

ESV World

- - -

Oct

-1009 09 10 - 10

- 10

- 10

- 10

- 10

- 10

- 10

- 10

Nov

Dec

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

ENSCO vs. World - utilization ENSCO vs. World - Dayrates

3


Floater utilization and DayratesOn a regional basis the ENSCO’s market share is highly influenced by rig type. Within the Gulf of Mexico, ENSCO’s greatest revenue exposure involves servicing the ultra-deepwater market with its semisubmersible fleet. ENSCO’s current fleet of four semisubs is approximately 11% of the GOM’s deepwater drilling assets.

the dayrate trends illustrated in the chart below include estimated standby rates for ENSCO’s fleet. However, a lack of standby rate disclosure by other firms presents a challenge for comparing ENSCO to the industry. When we took averaged rates (excluding standby), we found that ENSCO’s average and the industry’s average for ultra-deepwater floaters in the Gulf of Mexico were comparable.

SOURCE: RigLogix

ESV GOM

Oct

-- - - 1009 09 10 - 10

- 10

- 10

- 10

- 10

- 10

- 10

- 10

Nov

Dec

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

60%

65%

70%

75%

80%

85%

90%

95%

100%

ENSCO Versus GOM -Floater Utilization

SOURCE: RigLogix

ESV GOM

Oct

-- - - 1009 09 10 - 10

- 10

- 10

- 10

- 10

- 10

- 10

- 10

Nov

Dec

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

ENSCO Versus GOM - Floater Dayrates

300

325

350

375

400

425

450

475

500

ENSCO vs. GOM - Floater utilization ENSCO vs. GOM - Floater Dayrates

Summary of Floater Market (As of October 2010)

Region Active Marketed Utilization Avg Dayrate

Africa (Primarily W Africa) 28 32 88% $428Asia Pacific/Australia 43 61 70% $353Gulf of Mexico (US) 26 36 72% $388Latin America 63 70 90% $322Middle East/Eastern Europe 9 12 75% $445North Sea 36 39 92% $400

Total 208 250 83% $372

ENSCO (As of October 2010)

Region Active Marketed Utilization Avg DayrateGulf of Mexico (US) 3 4 75% $332

Total 3 4 75% $332

4


Jackup utilization & DayratesENSCO’s jackup fleet is evenly deployed throughout the world. On average, ENSCO’s jackup dayrates are on par with current global rates. the one exception is the North Sea. this is due to variances between conditions within the region. In the southern section (i.e. the uK where ENSCO’s rigs are domiciled), dayrates are

significantly lower than the Norwegian portion. Overall, the slight discount that ENSCO is receiving appears to be more than offset by the company’s ability to optimize the use of its jackups. Specifically, ENSCO’s jackups are averaging 80% utilization, compared to an industry-wide jackup utilization of 67%, during the month of October.

Summary of Jackup Market (As of October 30, 2010)

Region Active Marketed Utilization Avg DayrateAfrica (Primarily W Africa) 17 29 59% $115Asia Pacific/Australia 104 129 81% $119Gulf of Mexico (US) 32 81 40% $63Latin America 33 48 69% $107Middle East/Eastern Europe 102 149 68% $116North Sea 29 38 76% $151

World Wide 318 473 67% $114

ENSCO (As of October 30, 2010)

Region Active Marketed Utilization Avg DayrateAfrica (Primarily W Africa) 1 1 100% $140Asia Pacific/Australia 8 9 89% $107Gulf of Mexico (US) 6 9 67% $71Latin America 5 6 83% $92Middle East/Eastern Europe 6 10 60% $112North Sea 8 8 100% $123

World Wide 33 41 80% $102

SOURCE: RigLogix

ESV World

- - -09 09 10 - 10

- 10

- 10

- 10

- 10

- 10

- 10

- 10

Nov

Dec

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

- 10

Oct

60%

65%

70%

75%

80%

85%

90%

95%

100%

ENSCO Versus World - Jackup Utilization

SOURCE: RigLogix

ESV World

Oct

-- - - 1009 09 10 - 10

- 10

- 10

- 10

- 10

- 10

- 10

- 10

Nov

Dec

Jan

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

60

80

100

120

140

160

180

ENSCO Versus World - Jackups DayratesENSCO vs. World - Jackup utilization ENSCO vs. World - Jackup Dayrates

5


ENSCO’s jackup fleet (41 rigs) ranks third behind transocean (65 rigs) and Noble Drilling (43 rigs) when comparing public-traded firms that are listed on u.S. exchanges in marketed size. In terms of asset quality, over half of ENSCO’s jackups are rated for water depths of 300’ or greater. ENSCO’s premium jackup count of 16 rigs is larger than all other public offshore drillers

except transocean (19 rigs) and rowan (19 rigs). Premium jackup rigs have not been plagued by the competitive pressures that have resulted in damped utilization levels for jackups with lesser capabilities. Similarly, the newest floating rigs capable of drilling in the deepest waters are in greater demand than prior generations.

rig type Profiles

ESV vs. Publicly-Traded Fleet Composition (Rig Type)

Under 300 ft. 300 ft. Over 300 ft. MarketMidWater DeepWater Ultra-DW Share

Jackups 1 2 3 1%Floaters 3 4 2%

Jackups 7 2 13 3%Floaters 7 6 33 13%

Jackups 6 16 41 9%Floaters 5 5 2%


Jackups 5 7 1%Floaters 5 5 16 6%

Jackups 6 19 26 5%Floaters



Jackups 131 147 476Floaters 56 83 251

Type Total

Atwood Oceanics

Seadrill Ltd

Worldwide Count

Diamond Offshore

Noble Drilling

Rowan

Transocean Ltd

ENSCO

Pride International

1

420

19

153

26

1

1

1428

198112

6


Geographic PenetrationENSCO has rigs operating in all of the major regions (Africa, Asia, Gulf of Mexico, latin America, Middle East, and North Sea) except Africa. When comparing penetration of the jackup markets on a regional basis,

the only rivals ENSCO has are transocean and Noble Drilling. Conversely, ENSCO’s entry into the deepwater markets is emerging as they complete their newbuild strategy of deploying ultra-deepwater 8500 series rigs.

Type Africa Asia GOM LAM Middle East

North Sea

Other Total

Atwood Oceanics Jackups 1 1 1 3Floaters 1 2 1 4

Diamond Offshore Jackups 1 6 3 3 13Floaters 2 6 5 16 1 3 33

ENSCOJackups 9 9 5 10 8 41Floaters 1 4 5

Hercules Offshore Jackups 1 13 22 4 31Floaters

Noble Drilling Jackups 5 4 12 13 9 43Floaters 2 8 7 1 1 1 20

Pride International Jackups 1 2 4 7Floaters 4 2 9 1 16

Rowan Jackups 8 2 11 3 11 26Floaters

Seadrill LtdJackups 9 3 2 1 15Floaters 2 2 1 4 4 13

Seahawk Drilling Jackups 20 200

0

0

Floaters

Transocean Ltd Jackups 13 24 2 19 7 65Floaters 14 17 13 10 2 14 2 72

Worldwide Count Jackups 28 131 80 47 148 38 4 476Floaters 32 60 36 69 12 39 3 251

ESV vs. Publicly-Traded Fleet Composition (Regional)

7


ENSCO’s penetration of the premium markets for both floaters and jackups is at the heart of why its utilization levels compare favorably to its publicly traded peers. Historically, ENSCO’s utilization

Similar to comparisons with the global rig fleet, ENSCO’s rigs, on average, command dayrates that are approximately $120k/day below publicly-traded peers. As we previously noted, this is due to the disparity in ENSCO’s fleet mix (predominantly jackups) when compared to the average. While in today’s marketplace the weakness

average of 90% has surpassed its peers by 1000 basis points. Currently, ENSCO’s utilization rate of 76% is 800 basis points higher than its peers’ 68% average.

in overall jackup dayrates is a disadvantage for ENSCO, the short duration of these contracts could work to ENSCO’s advantage once a little price inflation enters the market. Here, we would anticipate that ENSCO’s revenue growth rate would turn in a better performance than its peers and thus drive a higher valuation in its share price.

Current HistoricalCompanies Active Marketed Utilization Average

Atwood Oceanics 5 7 71% 92%Diamond Offshore 34 46 74% 85%Seahawk 6 20 30% 33%Hercules 16 31 52% 68%Noble Drilling 49 63 78% 91%Pride International 14 23 61% 84%Rowan Companies 16 26 62% 91%Transocean 93 137 68% 83%Seadrill 27 28 96% 90%Peer Average 260 381 68% 80%

ENSCO plc 35 46 76% 90%

Dayrates Peak OffCompanies ($ 000) ($ 000) Peak

Atwood Oceanics 286 329 -13%

Diamond Offshore 262 275 -5%

Seahawk 37 84 -55%

Hercules 75 91 -18%

Noble Drilling 152 208 -27%

Pride International 268 268 0%

Rowan Companies 148 189 -22%

Transocean 305 305 0%

Seadrill 338 424 -20%

Peer Average 241 268 -10%

ENSCO plc 116 175 -34%

utilization and Dayrate Comparison With Public Firms

Operating Metrics

8


Financial MetricsFrom both a balance sheet and income statement perspective, ENSCO’s financial performance outshines its peers. Specifically, ENSCO’s operating margins in the most recent quarter and over the past twelve months are significantly higher than the industry

average. ENSCO’s debt on its books is relatively small by comparison. At just 4% of its market capitalization, ENSCO’s lack of debt puts it in an enviable position that clearly sets it apart from its peers that, on average, have approximately 46% debt-to-market capitalization ratios.

Debt to Operating Operating FY 2011Companies Capital Margin (MRQ) Margin (LTM) EPS P/EAtwood Oceanics 10.0% 51.3% 49.1% $4.36 8.1xDiamond Offshore 15.4% 39.7% 45.6% $6.68 10.4xSeahawk 0.0% (133.6%) (96.3%) ($4.41) NMHercules 282.6% (0.8%) (10.8%) ($0.57) NMNoble Drilling 29.6% 17.7% 42.1% $4.16 8.7xPride International 31.9% 16.2% 12.8% $2.85 11.7xRowan Companies 44.2% 20.1% 22.8% $2.28 14.1xTransocean 63.0% 27.9% 34.7% $7.72 8.3xSeadrill 63.0% 41.1% 42.2% $3.32 10.0xPeer Average 46.4% 28.5% 34.5% 10.2x

ENSCO plc 3.8% 30.6% 39.8% $4.19 12.0x

Financial Comparison With Public Firms

9


the DuPont Corporation devised a method of deconstructing a company’s return on Equity (rOE) into components. this method is commonly referred to as DuPont Analysis. the three components used to derive rOE are Net Profit Margin (net income divided by sales), Asset turnover (ltM sales divided by total assets), and

leverage ratio (Assets divided by Equity). Multiplying these three components together yields a company’s rOE (net income divided by equity) as all the other components cancel out one another. the value of using the DuPont Analysis is that it enables the observer to gain a better understanding of how a company is achieving its rOE.

With such a low leverage ratio, ENSCO could add approximately $2 billion debt to its balance sheet (offset by asset purchases) before approaching the average debt levels of its publicly traded peers. these assets, when fully operational, would likely generate another $500 million in earnings or add $3.50 in EPS per year

to the company’s bottom line. In our view, this would imply that ENSCO’s future valuation could approach $114 (12x future annual earnings of $9.50, five years into the future). Discounting this target back five years at a 8.5% discount rate suggests the upside to the current share price of approximately $50 is $26 or about +50%.

DuPont Analysis

ESV DO RIG NE PDE RDC ATW SDRL AVG

Net Profit 658.4 990 2,493 1,122 134 284 241 1,292 Sales 1,783.6 3,373 10,149 3,104 1,376 1,760 621 3,528

Profit Margin (LTM) 36.9% 29% 25% 36% 10% 16% 39% 37%27.3%

Sales 1,783.6 3,373 10,149 3,104 1,376 1,760 621 3,528 Assets 7,110.0 6,501 39,330 11,006 6,920 6,561 1,665 15,894

Asset Turnover 25% 52% 26% 28% 20% 27% 37% 22%30%

Assets 7,110.0 6,501 37,330 11,006 6,920 6,561 1,665 15,894 Equity 5,873.0 3,738 20,039 7,201 4,456 3,684 1,304 5,240

Leverage Ratio 1.2x 1.7x 1.9x 1.5x 1.6x 1.8x 1.3x 3.0x1.8x

ROE 11% 26% 12% 16% 3% 8% 18% 25% 15%

Risk/Reward Pro�le:

ESV DO RIG NE PDE RDC ATW SDRL AVGCurrent 2011 P/E 12.0x 10.4x 8.3x 8.7x 11.7x 14.1x 8.1x 10.0x

10.2xConsensus EPS $4.19 $6.68 $7.72 $4.16 $2.85 $2.28 $4.36 $3.32Current Price $50.14 $69.80 $63.92 $36.34 $33.29 $32.18 $35.50 $33.09

Peak Share Price P/E 11.2x 17.8x 12.6x 13.0x 17.0x 11.1x 23.9x 19.3x 16.4xLow Share Price P/E 2.8x 5.5x 5.0x 3.6x 3.1x 2.4x 3.4x 2.7x 3.7x

Implied Risk:Upside -7% 71% 53% 49% 46% -21% 194% 94% 61%

Downside -77% -47% -40% -59% -73% -83% -58% -73% -64%

Recent Peak Price $145.68 $161.40 $67.98 $47.79 $47.34 $62.17 $34.38

LTM Peak EPS $7.37

$82.22

$22.11

$8.17 $12.77 $5.23 $2.81 $4.27 $2.60 $1.78

Recent Low Price $54.29 $42.24 $20.62 $11.40 $10.33 $13.49 $5.17LTM Peak EPS $7.90 $9.84 $8.52 $5.74 $3.68 $4.35 $3.96 $1.89

Dupont Analysis


10

risk - reward Profile

ESV DO RIG NE PDE RDC ATW SDRL AVG

Net Profit 658.4 990 2,493 1,122 134 284 241 1,292 Sales 1,783.6 3,373 10,149 3,104 1,376 1,760 621 3,528

Profit Margin (LTM) 36.9% 29% 25% 36% 10% 16% 39% 37%27.3%

Sales 1,783.6 3,373 10,149 3,104 1,376 1,760 621 3,528 Assets 7,110.0 6,501 39,330 11,006 6,920 6,561 1,665 15,894

Asset Turnover 25% 52% 26% 28% 20% 27% 37% 22%30%

Assets 7,110.0 6,501 37,330 11,006 6,920 6,561 1,665 15,894 Equity 5,873.0 3,738 20,039 7,201 4,456 3,684 1,304 5,240

Leverage Ratio 1.2x 1.7x 1.9x 1.5x 1.6x 1.8x 1.3x 3.0x1.8x

ROE 11% 26% 12% 16% 3% 8% 18% 25% 15%

Risk/Reward Pro�le:

ESV DO RIG NE PDE RDC ATW SDRL AVGCurrent 2011 P/E 12.0x 10.4x 8.3x 8.7x 11.7x 14.1x 8.1x 10.0x

10.2xConsensus EPS $4.19 $6.68 $7.72 $4.16 $2.85 $2.28 $4.36 $3.32Current Price $50.14 $69.80 $63.92 $36.34 $33.29 $32.18 $35.50 $33.09

Peak Share Price P/E 11.2x 17.8x 12.6x 13.0x 17.0x 11.1x 23.9x 19.3x 16.4xLow Share Price P/E 2.8x 5.5x 5.0x 3.6x 3.1x 2.4x 3.4x 2.7x 3.7x

Implied Risk:Upside -7% 71% 53% 49% 46% -21% 194% 94% 61%

Downside -77% -47% -40% -59% -73% -83% -58% -73% -64%

Recent Peak Price $145.68 $161.40 $67.98 $47.79 $47.34 $62.17 $34.38

LTM Peak EPS $7.37

$82.22

$22.11

$8.17 $12.77 $5.23 $2.81 $4.27 $2.60 $1.78

Recent Low Price $54.29 $42.24 $20.62 $11.40 $10.33 $13.49 $5.17LTM Peak EPS $7.90 $9.84 $8.52 $5.74 $3.68 $4.35 $3.96 $1.89

both rowan Companies and ENSCO are trading at forward P/E ratios that are above those achieved when the companies’ share prices were trading at their peak. A literal interpretation of these patterns would indicate that the share prices for both, at this point in the cycle, hint at overvaluations. Given that both are dominant players in the high-spec jackup market, this provides some support for their premium valuations.

taking the 50% upside to valuation based on a raising debt levels closer to industry norms yields a more balanced risk profile than the negative 7% upside implied by using historical peak multiples. Further, it is our opinion that this opportunity and other factors, such as higher margins and a pattern of consistent

execution of operating strategies, are all influencing the market’s premium valuation of ENSCO. thus, overlaying our analysis with the recent share price action collectively points to a scenario of continued momentum where ENSCO’s shares are likely to continue climbing as long as commodity prices for oil and gas remain stable.

From a relative valuations perspective, ENSCO’s shares are currently trading at premium to its peers based on consensus 2011 P/E ratios. Specifically, ENSCO’s shares are trading at a 17% premium at 12.0x 2011 consensus EPS estimates of $4.19. the peer group trades at 10.2x 2011 earnings estimates. to summarize what we have detailed previously: we believe the premium valuation is warranted because of ENSCO’s lower debt profile and industry-leading margins.

We constructed a risk/reward profile based on recent peak and trough share prices for ENSCO and its peers. using the prior four quarters EPS results corresponding to the dates that the highs and lows were set, we calculated the peak and trough Price/Earnings ratios for

each of the companies. then by multiplying consensus 2011 estimates for each firm by the peak and trough P/E ratios, we were able to arrive at both the upside potential and downside risk relative to current share prices.

risk/ reward Comparison

Source: thomson Financial

11


Share Price Performance

returns Past Month (Ending Nov 5, 2010)

SOURCE: RigLogix

0% 5% 10% 15%

OSX

S&P 500

PeerAverage

ENSCO plc

Returns in Past Month

2010 year-to-Date returns

OSX

S&P 500

PeerAverage

ENSCO plc

-20% -15% -10% -5% 0.% 5% 10% 15% 20%

Returns Year-to-Date

returns Past year (Ending Nov 5, 2010)

OSX

S&P 500

PeerAverage

ENSCO plc

-20% -15% -10% -5% 0% 5% 10% 15%

Returns in Past Twelve Months Past three years (Compounded Annual Growth rate)

OSX

S&P 500

PeerAverage

ENSCO plc

-10% -8% -6% -4% -2% 0%

Returns in Past Three Years (CAGR)

riglogix november 15, 2010 - rigzone · its premium valuation while also providing a solid overview...

Documents